prolor biotech, inc. outperform · 2014-03-01 · prolor biotech, inc. initiating with outperform:...

EQUITY RESEARCH

INITIATION OF COVERAGE

Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229

Boris Peaker, Ph.D., CFA212 [email protected]

Matthew Pommer, [email protected]

Oppenheimer & Co. Inc. does and seeks to do business with companies coveredin its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investmentdecision. See "Important Disclosures and Certifications" section at the end ofthis report for important disclosures, including potential conflicts of interest. See"Price Target Calculation" and "Key Risks to Price Target" sections at the end ofthis report, where applicable.

Stock Price Performance Company DescriptionPROLOR is an innovativebiopharmaceutical company developingnew versions of therapeutic proteins.The leading asset is a long-actingversion of human growth hormoneincorporating carboxyl terminal peptidetechnology to increase its lifespan.Versions of Factor VIIa, Factor IX, andanti-obesity peptide oxyntomodulin arealso being developed.

August 29, 2012 HEALTHCARE/EMERGING BIOTECHNOLOGY

Stock Rating:

OUTPERFORM12-18 mo. Price Target $7.00PBTH - NYSE $4.69

3-5 Yr. EPS Gr. Rate NM52-Wk Range $6.69-$3.11Shares Outstanding 63.4MFloat 45.3MMarket Capitalization $297.4MAvg. Daily Trading Volume 63,628Dividend/Div Yield NM/NMBook Value $0.67Fiscal Year Ends Dec2012E ROE NMLT Debt $0.0MPreferred NMCommon Equity $43MConvertible Available Yes

EPSDiluted Q1 Q2 Q3 Q4 Year Mult.

2011A (0.08) (0.07) (0.06) (0.09) (0.29) NM2012E (0.09)A (0.05)A (0.08) (0.09) (0.31) NM2013E (0.09) (0.09) (0.09) (0.08) (0.36) NM

Prolor Biotech, Inc.Initiating with Outperform: A Lasting Opportunity inTherapeutic ProteinsSUMMARY

We are initiating coverage of PROLOR Biotech with an Outperform rating and $7 pricetarget. PROLOR is a biopharmaceutical company developing proprietary long-actingversions of already approved therapeutics. PROLOR's leading asset is hGH-CTP, along-acting version of human growth hormone (HGH). A Phase III trial of hGH-CTP inadults is expected to start by year-end. We highlight that if approved, hGH-CTP wouldbe the first long-acting HGH on the market. In addition, PROLOR has exclusive rightsto CTP technology for all but four proteins. Merck developed and now sells a fertilitydrug using CTP modification, which we believe validates this technology. In our view,PROLOR remains still largely overlooked despite multiple 12-18 month catalysts.

KEY POINTS

■ We believe PROLOR's hGH-CTP asset could offer a clear advantage to availabletherapies in an established $2.5-3.0B market. Results are expected by YE13 inboth the Phase II pediatric study and Phase III study in adults.

■ Factor VIIa-CTP is a long-acting version of Factor VIIa used for the treatment ofhemophilia. Preclinical results suggest that the candidate can potentially reducethe severity and duration of bleeding events as well as dosing frequency. Weexpect this candidate to advance into Phase II testing in 1H13.

■ Factor IX is commonly used to treat hemophilia B. In addition to its Factor VIIaprogram, PROLOR is using its CTP technology to develop a longer acting FactorIX called Factor IX-CTP. We believe that PROLOR's Factor VIIa and Factor IXcandidates represent upside not currently included in our valuation.

■ PROLOR is developing a long-acting version of oxyntomodulin using reversiblePEGylation technology. We believe that preclinical data are encouraging andexpect commencement of a Phase I trial in 1H13. We believe PROLOR couldseek to partner this candidate given the large requisite trials. We do not currentlyincorporate this drug into our valuation of PROLOR.

■ We derive our price target for PROLOR through NPV analysis of only its leadingasset, hGH-CTP. Our valuation assumes PROLOR partners hGH-CTP following asuccessful Phase III trial and captures 40% of the market. We do not assign valueto PROLOR's technology or other candidates in development.

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Table Of Contents

Page

Investment Thesis 3

Key Milestones 4

Valuation 5

Key Risks to Our Thesis and Price Target 7

Financial Overview and Projections 8

CTP Technology Overview 11

Human Growth Hormone (hGH) Program 11

Factor VIIa-CTP (MOD-5017) in Hemophilia 18

Factor IX-CTP (MOD-9017) in Hemophilia 20

Oxyntomodulin (MOD-6030) in Diabetes Type II & Obesity 22

Other Development Programs 25

Key Licensing Agreements 25

Management Biography 27

Prolor Biotech, Inc.

3

Investment Thesis PROLOR Biotech is a development-stage biopharmaceutical company with a therapeutic

focus on endocrinology, hemophilia, and obesity. PROLOR’s most advanced drug

candidate is a long-acting version of human growth hormone (hGH) called hGH-CTP. The

company expects to commence a Phase III study of hGH-CTP by YE12 for adult growth

hormone deficiency (GHD). PROLOR is also evaluating hGH-CTP in an ongoing Phase II

study for GHD in children. If successful, hGH-CTP could enter the $2.5- 3.0B hGH

replacement market and replace once-daily hGH injection products with once-weekly

injections of hGH-CTP. Reducing the number of painful injections would likely improve

patient compliance, clinical outcomes, and lower costs to payers. We believe hGH-CTP

has the potential to take significant share in the hGH market.

PROLOR’s technology platforms allow it to develop drugs designed to increase the

lifespan of proteins and peptides in the body. The company has certain exclusive

worldwide rights to CTP, a short, naturally occurring peptide that can be used to slow the

removal of a therapeutic protein from the body. The company’s hGH-CTP and hemophilia

candidates incorporate CTP while its obesity candidate uses a reversible PEGylation

technology. Below we highlight the key strengths of each drug in development.

Growth Hormone Deficiency - hGH-CTP

The results of a 39-patient Phase II study of hGH-CTP had no unexpected adverse

events, and data showed excellent safety and tolerability. The study confirmed the

potential of hGH-CTP to maintain efficacy while reducing injection frequency to once-

weekly or twice-monthly. PROLOR expects to initiate a 120-150 patient Phase III study to

evaluate 6 months efficacy and 12 months safety by YE12. hGH-CTP received orphan

designation in adult and pediatric GH deficiency, and as such only a single Phase III study

is required to gain approval for each indication.

Hemophilia - Factor VIIa & Factor IX

PROLOR is developing Factor VIIa-CTP and Factor IX-CTP, both long-acting versions of

Factor VIIa and Factor IX, respectively, for the treatment of hemophilia. Both candidates

have encouraging preclinical data showing increased half-life and drug exposure

compared to the unmodified protein. As a result, bleeding events were shorter and less

blood was lost. Hemophilia is a complex disease that can be life threatening. PROLOR

expects to advance Factor VIIa-CTP to pre-IND submission level in 2012 and initiate a

Phase II clinical study for hemophilia in 1H13.

Obesity & Diabetes Type II - OXM-RPEG

OXM-RPEG is a long-acting form of oxyntomodulin, a naturally occurring peptide strongly

implicated in satiation (the feeling of being full after eating). Using its reversible

PEGylation (RevPEG), PROLOR has extended the half-life of oxyntomodulin in its OXM-

RPEG drug candidate. With promising preclinical data showing the potential for significant

weight loss using twice-weekly injections, PROLOR expects to advance the candidate to

pre-IND submission level in 4Q12 and commence a Phase I study for type II diabetes in

1H13. Given the trial sizes and costs required to advance an obesity drug candidate,

PROLOR anticipates it will seek a partner to further develop its anti-obesity candidate.


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Exhibit 1: PROLOR Biotech Pipeline

Indication Product Preclinical Phase I Phase II Phase III

Growth

DisordershGH-CTP

HemophiliaFactor VIIa-CTP

………………..

Factor IX-CTP

Diabetes TII /

Obesity

GLP1/Glucagon

dual receptor

agonist.

1/week injection

2/week injection

…...…………...………...…..

1/week injection

1/week injection

Source: Company reports; Oppenheimer & Co.

Key Milestones

Exhibit 2: PROLOR Biotech Key Milestones

Date Stage Milestone

hGH-CTP (MOD-4023) in Growth Hormone Deficiency

YE12 Phase III Start Phase III study

YE13 Phase III Results of Phase III study in hGH-CTP in adults with GHD

YE13 Phase II Results of Phase II study of hGH-CTP in children with GHD

OXM-RPEG (MOD-6030) in Diabetes Type II

4Q12 Preclinical Complete pre-IND studies, submit IND

1H13 Phase I Initiate Phase I study

Factor VIIa-CTP (MOD-9017) in Hemophilia

4Q12 Preclinical Complete pre-IND studies, submit IND

1H13 Phase II Initiate Phase II study of Factor VIIa-CTP in hemophilia

Source: Company reports, clinicaltrials.gov; Oppenheimer & Co. estimates.


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Valuation

Initiating with Outperform Rating and $7 Price Target

Our valuation of PROLOR Biotech is based on NPV analysis of only its leading drug

candidate, hGH-CTP, for the treatment of GH deficiency in children and adults. We do not

explicitly model the pediatric and adult patient population because that is likely to lead to

errors given the range of doses and duration of GH treatment, particularly in adults. As

such, we assumed that hGH-CTP will capture a 40% market share of the existing hGH

market at peak and be priced in parity to current hGH products. We estimate the hGH

market to grow at a 2% CAGR from the $2.75B current market size and for PROLOR to

maintain exclusivity for hGH-CTP through patent expiry in 2032. Additionally, given the

large commercial infrastructure requirements for hGH-CTP, we believe that the best

commercial strategy for PROLOR is to partner hGH-CTP upon completion of the Phase III

study (Exhibit 3). From the competitive perspective, we anticipate that hGH biosimilars will

continue to enter the market, but we do not believe that these new entrants will impact

PROLOR’s hGH-CTP due to its dosing convenience advantage. Applying a 70%

probability of success for hGH-CTP, a 15% discount rate and a ~71M fully diluted share

count in 3Q13, we arrive at our 12-month price target of $7/share.


6

Exhibit 3: hGH-CTP NPV Model

Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Total hGH WW Market Size ($MM) $2,750 $2,805 $2,861 $2,918 $2,977 $3,036 $3,097 $3,159 $3,222 $3,287 $3,352 $3,419 $3,488 $3,557 $3,629 $3,701 $3,775 $3,851 $3,928 $4,006 $4,086

hGH-CTP Market Share 5% 10% 20% 30% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40%

hGH-CTP Total WW GHD Revenue ($MM) $146 $298 $607 $929 $1,264 $1,289 $1,315 $1,341 $1,368 $1,395 $1,423 $1,451 $1,480 $1,510 $1,540 $1,571 $1,602 $1,635

Royalty to PROLOR (30%) $44 $89 $182 $279 $379 $387 $394 $402 $410 $419 $427 $435 $444 $453 $462 $471 $481 $490

Expenses

R&D Expenses $15 $20 $24 $25 $30 $36 $43 $35 $28 $17 $10 $6 $5 $5 $5 $5 $5 $5 $5 $5 $5

Royalty to Washington University $0 $0 $0 $4 $9 $18 $28 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

COGS $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

G&A $3 $4 $6 $10 $10 $12 $12 $13 $13 $13 $14 $14 $14 $15 $15 $15 $16 $16 $16 $17 $17

Sales & Marketing $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Total expenses $19 $24 $30 $39 $49 $66 $83 $48 $41 $30 $24 $20 $19 $20 $20 $20 $21 $21 $21 $22 $22

Pre-tax cashflow ($MM) -$19 -$24 -$30 $4 $40 $116 $196 $332 $346 $365 $378 $390 $400 $407 $415 $424 $432 $441 $450 $459 $468

Probability of cashflow 100% 100% 100% 100% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70%

Risk-adjusted pre-tax cashflow ($MM) -$19 -$24 -$30 $4 $28 $81 $137 $232 $242 $255 $265 $273 $280 $285 $291 $297 $302 $309 $315 $321 $328

Total Risk-Adjusted Cashflow, pre-tax ($MM) -$19 -$24 -$30 $4 $28 $81 $137 $232 $242 $255 $265 $273 $280 $285 $291 $297 $302 $309 $315 $321 $328

Taxes ($MM) $0 $0 $0 $1 $7 $20 $34 $58 $61 $64 $66 $68 $70 $71 $73 $74 $76 $77 $79 $80 $82

After tax cashflow -$19 -$24 -$30 $3 $21 $61 $103 $174 $182 $192 $199 $205 $210 $214 $218 $350 $356 $364 $372 $378 $386

Discount rate 15%

NPV ($MM) $500

NPV/share $7.15 Source: Oppenheimer & Co. estimates


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Key Risks to Our Thesis and Price Target

There are multiple risks and uncertainties associated with investment in development-

stage biotechnology companies. We recommend investors review PROLOR’s regulatory

filings for the detailed summary of investment risks, and below we highlight the key risks

that relate to our thesis and price target.

Clinical Trial Risk

PROLOR is or will soon be conducting several ongoing clinical studies. There is a risk that

these trials may not meet their endpoint(s), and as such, may not lead to marketing

approval.

Regulatory Risk

PROLOR’s assets will require FDA approval for commercialization in the US and similar

approvals in other geographies. There is risk the company may not successfully achieve

regulatory approval in the US or elsewhere.

Competitive Risk

There are many drugs approved and in development for the treatment of GH deficiency,

hemophilia, and anemia as well as obesity and type II diabetes. As such, PROLOR’s

assets will have to show at least a modest improvement in safety, efficacy, or convenience

to these agents, and there is risk that competitive profiles in clinical trials may not be

achieved.

Changes In Standard Of Care

hGH treatment remains controversial, particularly in adults, as some physicians and

regulators view the indications as largely cosmetic. As such, we believe that if the medical

community revises its view on the risk/benefit of hGH treatment due to safety concerns

and/or other reasons, the WW demand for hGH may be significantly impacted.

Partnership Risk

PROLOR may seek to enter into one or more partnerships with biotechnology companies

for the advancement of its clinical initiatives. There is risk that a disagreement with its

partners, change in control of the partner, or other unanticipated partner developments,

may negatively affect the advancement of PROLOR’s clinical programs.

Reimbursement Risk

Healthcare costs and reimbursement are prominent political items, particularly in light of

the budget deficits in the US and the rest of the world. PROLOR’s hGH-CTP may be

viewed as a cosmetic treatment in many indications, and as such, may be denied

reimbursement.

Liquidity and Small Capitalization

PROLOR Biotech is a small-capitalization (<$500M), unprofitable biotechnology company.

Although the stock is trading around $5/share, we believe that there is a limited market for

PBTH stock at this time, which may lead to volatility.


8

Financial Overview and Projections

Balance Sheet. As of June 30, 2012, PROLOR had total cash and equivalents of $42.5M.

This is inclusive of an offering completed in May 2012 of 7.475M shares of common stock

at $5.00/share for net proceeds of $35.0M. PROLOR believes it is sufficiently capitalized

until 2014.

Share Count. PROLOR had 63.4M shares of common stock outstanding at last report on

July 31, 2012. The number of common shares outstanding increased by 7.475M with the

offering in May. PROLOR had a total of 5.5M options (4.3M options exercisable with a

weighted average exercise price of $1.32) and 321K warrants at the end of 2Q12.

Financing History. PROLOR has a history of losses and may require additional financing

until it becomes cash flow positive. The company has $42.5M remaining on a $75M shelf

filed April 6, 2012, following an offering of 7.475M shares at $5/share that generated gross

proceeds of $37.38M. Since going public in May 2007, PROLOR has completed a number

of financings, which are detailed in Exhibit 4.

Exhibit 4: PROLOR Biotech Financing History

Date Amount Details

May 2012 $37.4M Issued 7.475M common shares at $5.00 per share

May 2010 All 1M issued and outstanding Series B shares converted to 2.2M common shares

May 2010 All 800K Series A shares converted to 4M common shares

March 2010 $24.4M Issued 10.4M common shares at $2.35 per share

July 2009 $2M Issued 1M preferred Series B shares to Frost Group; convertibleto 1 for 2 to common

March 2008 $2M Issued 800K preferred convertible Series A shares to Frost Group at $2.50

May 2007 $2M Private sale of 5.5M common shares & 333K warrants to Frost Group

May 2007 $3.4M Issued 2.2M common shares at $1.50/share & 562K warrants at $2.50/share

May 2007 $9.6M Issued 6.4M common shares at $1.50/share & 1.6M warrants at $2.50/share

Source: Company reports..

Ownership. PROLOR insider/stake ownership is significant at approximately 26% of

shares outstanding. PROLOR’s chairman, Phillip Frost, is the largest overall holder of

PROLOR stock (Exhibit 5).


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Exhibit 5: PROLOR Biotech Shareholders

Investor Name % Ownership Total shares

Phillip Frost 20.08% 12,309,935

Menora Mivtachim Life Insurance 4.32% 2,650,000

Jane H Hsiao 3.56% 2,179,856

Vanguard Group 3.10% 1,899,356

Fidelity Management 2.13% 1,304,800

Fuad Fares 1.90% 1,164,905

Perceptive Advisors 1.58% 970,000

Straus Asset Management 1.27% 775,532

Kingdon Capital Management 0.69% 425,000

Millennium Management 0.48% 291,080

Abraham Havron 0.40% 245,643

Migdal Mutual Funds 0.13% 81,683

Steven D Rubin 0.12% 73,086

Clal Finance Mutual Funds Management 0.11% 70,195

Healthcare Value Capital 0.09% 56,965

Jane Street Capital 0.08% 48,194

Morgan Stanley Smith Barney 0.05% 30,560

SagePoint Financial 0.04% 23,930

Croft-Leominster 0.03% 21,000

Merrill Lynch, Pierce, Fenner & Smith 0.03% 20,860

Source: FactSet; Company reports.

Revenue. As a development-stage biopharmaceutical company, PROLOR has not

generated revenues in the past, and we do not project the company to generate significant

revenues in 2012 or 2013. However, we believe that the company may generate revenue

from partnerships/licensing agreements before its assets gain marketing clearance from

the FDA and/or EMA.

Royalties. Under its license agreement with Washington University, PROLOR is required

to pay royalty fees of 1.5% to 5% from net revenues as well as other milestone fees until

the agreement terminates in 2018. These fees include an annual license fee of $30,000

that is payable until the first product generates revenue. Post-commercialization, royalties

owed will be set to $10,000 for the first year and increase by an amount of $10,000 for

each subsequent year of commercialization. If PROLOR were to sub-license the

technology covered by the Washington University agreement, fees of 7.5% to 20% would

apply to sub-licensing payments.

In exchange for funding received from the Israeli Office of the Chief Scientist, PROLOR

will pay 3% of revenues until these royalties to the Chief Scientist reach the amount of the

grants received plus interest at the rate of LIBOR. As of 1Q12, PROLOR has received

grants totaling $5.0M.

With respect to its agreement with Yeda for Reverse PEGylation technology, PROLOR will

pay annual fees of $10,000 until 2015, and $15,000 thereafter as well as a royalty of 3.5%

on sales and 40% on royalties for sublicensees.

Operating Expenses. Operating expenses including R&D and G&A totaled $11.4M and

$3.4M in 2011, respectively. For 2012 we project R&D and G&A expenses of $15.4M and

$3.5M, respectively. The increase in R&D spending projected for 2H12 and into 2013 is

related to the upcoming Phase III study of hGH-CTP and other clinical initiatives. Our

expectations are for R&D to climb again in 2013 to $20M while G&A is projected at $3.7M.


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Taxes. PROLOR Biotech and its subsidiary Modigene Inc. had carry-forward tax losses of

$3.7M at the end of 2011 while PROLOR Ltd. had carry-forward tax losses of $25.3M for

the same period. However, given the uncertainty in recognizing these tax assets, we did

not include them in our NPV model and assumed a flat tax rate of 25% in years of positive

cash flow.

Guidance. Currently PROLOR has not supplied detailed financial guidance. However, the

company anticipates the recent financing to be adequate to complete the Phase III study

of hGH-CTP.


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CTP Technology Overview

PROLOR has an exclusive license to technology developed at Washington University in

St. Louis. This technology is based on a short, naturally occurring peptide that was

discovered while conducting research into the female hormone human chorionic

gonadotropin (hCG). It was found that the two-day life span of hCG in the body is a result

of carboxyl-terminal peptide (CTP). Further investigation revealed CTP could be used to

extend the half-life of various peptides and proteins in the body without increasing toxicity

(Exhibit 6).

Exhibit 6: Carboxyl-Terminal Peptide (CTP) Increases Half-Life

Source: Company reports.

CTP Technology Validation by Merck

PROLOR has exclusive rights to CTP for all but four endocrine proteins: FSH, LH, TSH,

and hCG. These proteins were licensed to a company now owned by Merck. This is

important because Merck now markets a drug branded ELONVA, a follicle-stimulating

hormone (FSH) used as a fertility treatment. ELONVA utilizes the CTP technology and, as

a result, a single ELONVA treatment replaces seven consecutive daily injections. We also

highlight the Phase III ENGAGE trial, which included 1,509 subjects and was the largest

double-blind fertility trial ever conducted. In our view, the approval of ELONVA helps to

validate the potential safety and efficacy of CTP technology. CTP is capable of extending

plasma half-life while maintaining the biological activity of a therapeutic.

Human Growth Hormone (hGH) Program

Overview of Growth Hormone Deficiency (GHD)

Growth hormone (GH) is produced in the pituitary gland by somatotroph cells, which

secrete the polypeptide into the body. The hormone then binds to receptors on liver cells

as well as other cells. After the hormone binds to the target cell, a cascade of events

triggers the secretion of insulin-like growth Factor I (IGF-1), which plays a key role in the

growth of children as well as a role in a variety of functions in the body, such as improving

body composition.

Pediatric Setting Overview

GH deficiency in children can result in short stature. Diagnosis of the disorder is made on

the basis of height, height velocity and bone age. There are a variety of causes for

pediatric GH deficiency. For example, a wide range of congenital conditions resulting from


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genetic defects to anatomical difference in the brain can result in deficiency1. Exposure to

radiation and various tumors as well as chronic renal insufficiency and Turner’s syndrome

also can result in GH deficiency. Finally, idiopathic (unknown cause) short stature

represents at least one-third of all children treated with hGH in the US2.

Adult Setting Overview

FDA has approved GH therapy for adults if diagnostic tests indicate low levels of GH, or if

pituitary or hypothalamic disease is found. That said, GH therapy is prescribed to treat a

wide variety of conditions in adults. GH therapy has been studied for regional changes on

body composition such as reducing fat and increasing lean muscle mass. GH is used in a

wide variety of therapies, but has shown no consistent benefit in the treatment of obesity,

osteoporosis, muscular dystrophy, and infertility1.

Non-compliance Is a Major Issue

The treatment of human GH deficiency requires daily subcutaneous injections of

replacement human growth hormone (hGH). Therapy is costly, with the mean annual per-

patient wholesale acquisition cost (WAC) estimated to be ~$20K+ in the pediatric setting3

and a fraction of that in adults. Adding to the cost is non-compliance. One study showed

that 66% of patients were non-compliant and that missing more than one dose a week

significantly (p<0.01) reduced linear growth4. Non-compliance is the result of painful

injections5, long-term treatment

6, and treatment complexity.

7

In our view, hGH-CTP has the potential to significantly improve patient compliance. Key

benefits may include higher linear growth rates, lower payer costs, reduced therapy

duration, and improvements to quality of life measures. In summary, if hGH-CTP can

achieve once-weekly or twice-monthly dose administration with equivalent efficacy and

safety, we believe hGH-CTP stands to take a significant share of the $3B/yr hGH market.

Designing Long-Acting hGH - hGH-CTP (MOD-4023)

Given the significant compliance issues with marketed hGH products, PROLOR designed

a long-acting hGH by adding carboxyl-terminal peptide (CTP) to the coding region of

human growth hormone (hGH) cDNA8. Preclinical data showed significant increases to

bioactivity and prolonged in vivo half-life compared to the original hGH.

We would like to note that there have been several attempts by others to create second-

generation therapeutic proteins with longer half-lives and improved bioactivity using

1 Vance M.L. and Mauras N., Growth Hormone Therapy in Adults and Children. New England Journal

of Medicine (1999) 341: 1206-16. 2 Cuttler L. et al., Short Stature and Growth Hormone Therapy: A National Study of Physician

Recommendation Patterns. Journal of the American Medical Association (1996) 276: 531-7. 3 Lee J.M. et al., Estimated Cost-Effectiveness of Growth Hormone Therapy for Idiopathic Short Stature. Archives of Pediatric and Adolescent Medicine (2006) 160:263-269. 4 Cutfield W.S. et al., Non-Compliance with Growth Hormone Treatment in Children is Common and

Impairs Linear Growth. PLoS One. (2011) 6(1): e16223. 5 Main K.M. et al., Automatic Needle Insertion Diminishes Pain During Growth Hormone Injection.

Acta Paediatr 84: 331-34. 6 Haverkamp F. et al. Observations of Nonadherence to Recombinant Human Growth Hormone

Therapy in Clinical Practice. Clinical Therapy (1995) 30: 307-16. 7 Cromer B.A. and Tarnowski K.J., Noncompliance in Adolescents: A Review. Journal of

Development & Behavioral Pediatrics. (1989) 10: 207-15. 8 Fares F. et al., Designing a Long-Acting Human Growth Hormone (hGH) by Fusing the Carboxyl-

Terminal Peptide of Human Chorionic Gonadotropin β-Subunit to the Coding Sequence of hGH. Endocrinology. (2010) 151(9): 4410-17.


13

polyethylene glycol (PEG) or crystalline biopharmaceuticals9,

10,

11,

12

. However, it was

found that increasing the amount of PEG would linearly decrease the affinity of hGH for its

receptors, decreasing bioactivity drastically.

Phase I Clinical Study Data Summary

A Phase I study of hGH-CTP was initiated in September 2009 and completed in February

2010. The study was a randomized, double-blinded, placebo-controlled, single-dose,

dose-escalating, single-center trial designed to evaluate the safety, tolerability as well as

the pharmacokinetic and pharmacodynamic properties of hGH-CTP. The study enrolled

24 healthy volunteers who were randomized to receive placebo or one of three doses of

hGH-CTP (4mg, 7mg, or 21mg). The objective of the study was to evaluate safety and

tolerability as well as the potential for efficacy through measurements of insulin-like growth

factor (IGF-1), the primary indicator of hGH activity. Results showed PROLOR’s long-

acting hGH-CTP appears to be safe and has the potential to replace daily injections of

hGH with once-weekly or twice-monthly injections of hGH-CTP. Based on the results of its

Phase I study, PROLOR initiated a Phase II study in July of 2010.

Phase II Clinical Study in Adults - Data Summary

In August 2011 PROLOR announced top-line results from a Phase II study of hGH-CTP.

This Phase II study was a randomized open-label, multicenter study in adults with GH

deficiency. The objective of the study was to evaluate safety and tolerability after receiving

a once-weekly dose of hGH-CTP for four weeks. The study had three arms evaluating a

range of doses measured as the equivalent cumulative dose of commercial hGH. The

three cohorts tested the equivalent cumulative dose of 30%, 45% and 100%, respectively.

A total of 39 patients (42 subjects enrolled) was included in the evaluation of study results,

with 13 patients in each cohort. Each cohort contained two female and 11 male subjects.

Phase II data shows that hGH-CTP has the potential to replace daily hGH injections with a

once-weekly or even a twice-monthly injection of hGH-CTP (Exhibit 7), a significant

achievement, in our view. Data collected from 12 patients switched from daily injections to

twice-monthly injections of hGH-CTP at 50% regular cumulative dose showed results

supportive of possible twice-monthly injections.

9 Govardhan C. et al., Novel Long-Acting Crystal Formulation of Human Growth Hormone.

Pharmaceutical Research (2005) 22: 1461-70 10

Walsh G. Second-Generation Biopharmaceuticals. European Journal of Pharmaceutics and Biopharmaceutics (2004) 58: 185-96. 11

Clark R. et al., Long-Acting Growth Hormone Produced By Conjugation with Polyethylene Glycol. Journal of Biological Chemistry (1996) 271: 21969-21977. 12

Cox G.N. et al., A Long-Acting, Mono-PEGylated Human Growth Hormone Analog is A Potent Stimulator of Weight Gain and Bone Growth in Hypophysectomized Rats. Endocrinology (2007) 148: 1590-97.


14

Exhibit 7: Phase II Data Show IGF-1 Levels in Normal Range

Source: PROLOR Biotech.

Top-line data from a four-month treatment extension study to monitor insulin-like growth

factor 1 (IGF-1) levels, a protein stimulated by GH and used by endocrinologists to

monitor treatment of GH deficiency, showed that subjects were within the normal range

while receiving once-weekly hGH-CTP injections and that these levels were comparable

to patients receiving daily injections of hGH. We note that all patients recruited to the

study were already on daily hGH treatment and were within the normal range of IGF-1. In

addition to a comparable number of patients staying within a normal range, a higher

percentage of subjects treated with once-weekly hGH-CTP injections were within a narrow

normal range, defined as ±1.5 standard deviations of the norm (Exhibit 8). We note that

there were no unexpected adverse events in the study, and data confirmed safety and

tolerability.

Exhibit 8: IGF-1 Measurements Indicate hGH-CTP Equivalence


Upcoming Milestones

A Phase III study of hGH-CTP in adults with GH deficiency is expected to receive

regulatory clearance from FDA and EMA and commence by YE12. The study will test a

once-weekly injection of hGH-CTP in 120-150 patients. The Phase III study is structured

to evaluate 6 months efficacy and 12 months safety. Depending on the speed of

enrollment, the study could finish the efficacy phase before the end of 2013. Therefore, we

are modeling for a US launch in early 2015 with a launch in the EU the following year.


15

In the pediatric setting, PROLOR initiated a Phase II study in pediatric GH deficiencies

that is scheduled to enroll between 52 and 56 patients. The objective of this study is to

evaluate both safety and efficacy over 12 months, with the primary endpoint being height

velocity. We anticipate data by YE13.

Competitive Landscape

Human growth hormone (hGH) has been used since 1958 to treat GH deficiency. Initially

the only source for the hormone was human cadavers, and the human-derived GH was

produced and distributed by the NIH. This therapeutic was in limited supply and carried a

risk of disease transmission. The first recombinant human growth hormone (rhGH), called

Protropin (somatrem) and made by Genentech, was approved in 1985. Protropin was

identical to the natural human version of the drug with the addition of methionine amino

acid which was required to produce the protein in E. coli. This small modification resulted

in antibody production in some patients, and the product was discontinued in 2004. Over

the last 20 years HGH was approved for a range of indications in the US and EU (Exhibit

9).

Exhibit 9: Approved Indications for Growth Hormone in the US and EU

Source: Kemp S.F. et al., Emerging Options in Growth Hormone Therapy: an Update. Drug Design, Development and Therapy (2011) 5:411-419.

Dosing for HGH started out with 2x/week, which was then increased to 3x/week and

ultimately to daily administration. The increase in dosing frequency was due to

observation that more frequent dosing resulted in better outcome13

. This may be due to a

more natural and constant delivery of the hormone.

The market for HGH is a healthy $2.5-3B today, with 13 active products (Exhibit 10). With

the majority of the marketed drugs approved in the 1990s, most are not covered by

patents at this time. In fact, the most recent approvals were biosimilars, including Valtropin

from Biopartners (private) and Omnitrope from Sandoz, a subsidiary of Novartis.

13

Kemp S.F. et al., Emerging Options in Growth Hormone Therapy: an Update. Drug Design, Development and Therapy (2011) 5:411-419.


16

In our view, PROLOR’s hGH-CTP product has the potential to take significant market

share in the hGH market on the basis of once-weekly dosing. Daily injections of hGH are

associated with significant compliance issues, and minimizing the number of painful

injections would be viewed favorably by patients, in our view. Therefore, we feel hGH-CTP

stands to hold a clear competitive advantage over other products on the market, assuming

a comparable safety and efficacy profile.


17

Exhibit 10: Competitive Landscape – Approved hGH Drugs

Product Company Therapeutic indication Date approved Administration Revenues

Genotropin (r hGH produced in E. coli) Pfizer

GHD in children & adults; Turner syndrome;

SGA in children; idiopathic short stature;

Prader-Wili Syndrome

1995 (US) QD; SubQ injection $889M (2011)

Norditropin (r hGH produced in E. coli) Novo NordiskGHD in children & adults; Noonan syndrome;

Turnder syndrome; SGA in children1995 (US) QD; SubQ injection $888M (2011)

Humatrope (r hGH produced in E. coli) Eli Lilly

GHD in children & adults; idiopathic short

stature; Turner syndrome; growth failure in

children with SHOX; SGA in children

1987 (US) QD; SubQ injection $440.8M (2007)

Saizen (r hGH produced in a mammalian cell line) Merck Serono GHD in children & adults 1996 (US) QD; injection $300.8M (2011)

Nutropin AQ (r hGH produced in E. coli) Genentech

GHD in children & adults; chronic renal

insufficiency; Turner syndrome; idiopathic

short stature

2001 (EU), 1994 (US) QD; injection $282.1M (2011)

Omnitrope (somatropin, r hGH produced in E. coli) Sandoz (Basel)

GHD in children & adults; Prader-Wili

syndrome, Turner syndrome, SGA, and

idiopathic short stature in children

2006 (EU and US) QD; injection $261M (2011)

Serostim (r hGH produced in mammalian cell line)Merck Serono

(Geneva)AIDS-assoicated catabolism/wasting 1996 (US) QD; SubQ injection $93.6M (2010)

Increlex (mecasermin, r hIGF-1 produced in E. coli) Ipsen Severe primary IGF-1 deficiency 2005 (US and EU) QD; SubQ injection $33.7M (2011)

Nutropin (r hGH produced in E. coli) Genentech

GHD in children & adults; chronic renal

insufficiency; Turner syndrome; idiopathic

short stature

1994 (US) QD; injection NA

Somavert (pegvisomant, hGH analog (antogonist)

produced in E. coli)Pfizer Acromegaly 2003 (US), 2002 (EU) QD; SubQ injection NA

Tev-Tropin (r hGH produced in E. coli)Teva

PharmaceuticalsGHD in children 1995 (US)

3x per week;

injectionNA

Valtropin (somatropin, r hGH produced in S. cerevisiae) Biopartners (Baar) GHD in children and adults; Turner syndrome 2007 (US), 2006 (EU) QD; injection NA

Zorbtive (somatropin r hGH produced in mouse C127 cell

lineMerck Serono Short bowel syndrome 2003 (US) QD; injection NA

Source: FDA.gov; Walsh G. Biopharmaceutical Benchmarks 2010. Nature Biotechnology. 2010. 29;9:917-24; Company reports.


18

Market Opportunity

The overall adult GHD population is estimated at 6,000 new cases per year in the US and

with a prevalence of 35,000 in the US14

. In the pediatric setting the prevalence of GHD is

estimated to be one in 3,50015

. The annual cost of treatment varies ranges from $11K to

$25K in the pediatric setting and $10-12.5K for adults (Exhibit 11). Given the variability in

dosing and duration of treatment between the range of approved hGH indications, it is

difficult to build a precise model to arrive at the total hGH market size. However, given the

range of approved products the worldwide market size appears to be $2.5-3B/yr. We used

$2.75B as the basis to build on NPV model.

In our model we assume that PROLOR’s hGH-CTP will be priced on par with current hGH

drugs; however, we believe that PROLOR may justify a higher price due to the

convenience and compliance benefit. The benefit is not just for patients but also for payers

which may accept higher price for the increased compliance and potential outcome

improvement.

Exhibit 11: HGD Therapy Costs in the US

Agent Patient Group AWP Est. WAC

Growth hormone Pediatrics $13,000 - $30,000 (annual) $10,800 - $25,000 (annual)

Growth hormone Adults $12,000 - $15,000 (annual) $10,000 - $12,500 (annual)

Zorbtive Short Bowel Syndrome $21,504 (one 4-wk course) $17,920 (one 4-wk course)

Serostim AIDS Wasting Patients $5,000 - $7,500 (monthly) $4,200 - $6,250 (monthly)

IncrelexSevere Primary IGF-1

Deficiency$12,000 - $50,000 (annual) $10,000 - $42,000 (annual)

Source: BCBS of Western New York; Bazalo MS et al. Comparison of Human Growth Hormone Products’ Cost in Pediatric and Adult Patients A Budgetary Impact Model. Managed Care (2007) 16(9):45-51. Oppenheimer estimates

Go to Market Strategy

We believe that PROLOR may partner hGH-CTP with a pharmaceutical company that has

a commercial infrastructure in the hGH space or another endocrinology drug. In our view a

partnership at the end of Phase III seems like the ideal time to maximize shareholder

value. We estimate that given the late stage of the partnership, PROLOR could receive an

attractive royalty stream of 30%.

We note that in October of 2010 PROLOR’s hGH-CTP received orphan drug designation

in the US by FDA. The designation covers growth hormone deficiency in both adults and

children. In addition to seven years of market exclusivity, the designation provides for

lower regulatory fees, certain tax credits and regulatory support for R&D initiatives. Most

importantly, it suggests that hGH-CTP may gain approval based on a single Phase III trial.

Factor VIIa-CTP (MOD-5017) in Hemophilia

Hemophilia Background

PROLOR is developing a long-acting Factor VIIa for the treatment of hemophilia using its

CTP technology platform. Hemophilia is a group of rare bleeding disorders in which blood

14

AACE Clinical Practice Guidelines for Growth Hormone Use in Adult and Children. Endocrine Practice (1998) 4(3): 165-73. 15

Lindsay R. et al., Utah Growth Study: Growth Standards and the Prevalence of Growth Hormone Deficiency. Journal of Pediatrics (1994) 125:29-35.


19

clots are slow to form. The condition is characterized by prolonged bleeding events and

can be fatal in a small percentage of people. Bleeding is in response to injury, but in

severe cases bleeding can be spontaneous. About 70% of hemophilia A patients have the

severe form of the disorder16

. Hemophilia is a hereditary disorder that is much more

common in males (with rare exceptions) and has two primary types, namely hemophilia A

and hemophilia B. Both types of hemophilia involve different gene mutations on the X

chromosome. Specifically, Factor VIII is associated with hemophilia A, and a lack of

Factor IX is associated with hemophilia B. These clotting factors are part of a larger

clotting cascade involving a number of enzymes. The average incidence of hemophilia A

and B has been estimated at one in 5,000 live male births in the US17

.

Factor VIIa

Patients with hemophilia A or B can form inhibitors (antibodies) against Factor VIII or

Factor IX therapies and become refractory to factor replacement therapy. In these

refractory hemophilia patients Factor VIIa is used to prevent bleeding. Factor VIIa is a

central coagulation factor that works by activating the tissue factor coagulation pathway.

PROLOR is developing a long-acting version of Factor VIIa.

Factor VIIa therapy involves the intravenous delivery of NovoSeven, a recombinant

human Factor VIIa which is marketed by Novo Nordisk A/S and was approved by FDA in

2008. We note that NovoSeven is no longer protected by patents in the US, Japan, or

Europe. That said, NovoSeven generated DKK 8,347M (~$1,498M at the 2011 average

exchange rate) with 47% of revenues generated in the US ~$704M.

We believe that PROLOR’s Factor VIIa-CTP could offer certain competitive advantages

over NovoSeven. Namely, these advantages could include less frequent dosing as well as

shorter and fewer bleeding episodes.

Preclinical Data Summary

PROLOR recently presented data from its preclinical study evaluating its Factor VIIa-CTP

in animal models. This study evaluated pharmacokinetics, pharmacodynamic profiles, and

hemostatic effects in Factor VIII and Factor IX mice following bleeding challenge. The

results showed a longer half-life (5x) and total drug exposure (3.5x) higher than

recombinant Factor VII. As a result, the haemostatic effect was prolonged in mice.

Upcoming Milestones

We anticipate PROLOR will complete pre-IND studies in 4Q12 and commence a Phase II

study in 1H13. We note that safety concerns surrounding the administration of clotting

factors to healthy volunteers prohibit a Phase I study. Therefore, Factor VIIa-CTP will

advance directly to a Phase II study.

16

National Heart Lung and Blood Institute. (Explore Hemophilia: What is Hemophilia?) (July 01, 2011) National Institutes of Health: U.S. Department of Health and Human Services. From NIH website. Accessed 12 July 2012. 17

Soucie J.M. et al., Occurrence of Hemophilia in the United States. American Journal of Hematology (1998) 59:288-294.


20

Go To Market Strategy

In our view, PROLOR can license commercial rights to a larger pharmaceutical company

or attempt to commercialize VIIa-CTP itself. There are a total of 142 hemophilia treatment

centers in the US listed by the Centers for Disease Control on its website, and in our view

this is a reasonable number of clinics for PROLOR to service directly. In addition, given

the limited number of products on the market and the active and involved patient

community, we believe physician and patient awareness of the product will be high. At this

time, we do not assign a value to this program in our valuation of PROLOR, and we will

revisit this program once we see human data.

Factor IX-CTP (MOD-9017) in Hemophilia B

PROLOR is developing a longer acting Factor IX for the prophylactic treatment of

hemophilia B using its CTP technology platform. The condition causes patients to bleed

abnormally following injury and spontaneous bleeding in severe cases. Hemophilia B is a

hereditary condition caused by a defective gene on the X chromosome that leads to a lack

of clotting Factor IX. Those needing treatment will receive intravenous infusions of

replacement clotting factors. Mild and moderate cases often receive acute treatment, such

as before surgery, while severe cases receive chronic preventative treatment. In severe

cases of hemophilia B (Factor IX activity <1%) patients require preventative infusions18

two or three times weekly in the hospital.

Preclinical Data

PROLOR is developing a CTP-modified version of Factor IX, called Factor IX-CTP, and

the company reported preclinical data demonstrating a significant increase in clotting

duration activity in a hemophilic mouse model versus the FDA approved Factor IX,

BeneFIX (Exhibit 12). These data also show that bleeding episodes were shorter and less

intense, and none of the Factor IX-CTP treated animals had spontaneous re-occurring

bleeding.

Exhibit 12: Preclinical Study Design for Factor IX-CTP vs. BeneFIX


It can be seen from the Factor IX-CTP preclinical data (Exhibit 13) that mice receiving the

once-weekly injection of Factor IX-CTP lost less blood during both the first and second

bleeding event, and had no spontaneous bleeding events.

18

Medical and Scientific Advisory Council (MASAC), National Hemophilia Foundation. MASAC Recommendations Concerning Prophylaxis (Regular Administration of Clotting Factor Concentrate to Prevent Bleeding) (June 3, 2006). MASAC Recommendation #170. From National Hemophilia Foundation website. Accessed 11 July 2012.


21

Exhibit 13: Preclinical Factor IX-CTP Data

1st

Bleeding Event 12h Post 2nd

Bleeding Event

Clotting Activity Long Acting Clotting Activity

Blood Loss Blood Loss Bleeding Duration Bleeding Episodes

Compared to FIX-CTP Compared to FIX-CTP Compared to FIX-CTP (Spontaneous)

Untreated

Control vehiclex2.8 x4.6 x3.1 83%

BeneFIX x2 x3.8 x3.1 50%

FIX-CTP x1 x1 x1 0%

2nd

Bleeding Event

Long Acting Clotting Activity

Note: This assay compares clotting times of Untreated Control vehicle, BeneFIX and FIX-CTP. Source: PROLOR Biotech.

Market Opportunity & Competition

Hemophilia B is a relatively rare hereditary condition that is primarily found in males. The

prevalence of hemophilia B is approximately one in 25,000 males in the US19

with about

half of those having mild to moderate disease (Factor IX <1% of normal).

We believe the Factor IX market is >$700M annually with the largest product being

Pfizer’s BeneFIX at $693M in revenue for 2011. We have not assigned any value to

PROLOR’s Factor IX-CTP program at this time but highlight that it represents upside to

our current valuation.

With regard to the competitive landscape, it is worth mentioning that a number of

marketed products are derived from human plasma whereas Pfizer’s BeneFIX is a

recombinant product. We note that the recombinant human Factor VIIa, NovoSeven, is

used to treat hemophilia B in patients who have developed inhibitors against replacement

factors.

Exhibit 14: Factor IX Competitive Products

Company Brand Name Condition Indication Source Revenue ($M)

Pfizer BeneFIX Factor IX Hemophilia B recombinant $693M

Novo-Nordisk NovoSeven Factor VIIa Hemophilia recombinant $1,498M

Grifols AlphaNine SD Factor IX Hemophilia B human plasma NA

Grifols Profilnine SD Factor IX Hemophilia B human plasma NA

CSL Behring Mononine Factor IX Hemophilia B human plasma NA

Baxter Proplex-T Factor IX Hemophilia B human plasma NA

Baxter Bebulin VH Factor IX Hemophilia B human plasma NA

Source: FDA.gov; Company reports.

PROLOR has not commented yet when it anticipates advancing its Factor IX-CTP into

human clinical studies.

19

Kessler C.M. and Mariani G., Clinical Manifestations and Therapy of the Hemophilias. In: Colman R.W. et al., eds. Homeostasis and Thrombosis: Basic Principles and Clinical Practice. 5 ed. Philadelphia: Lippincott-Raven (2006) 887-904.


22

Oxyntomodulin (MOD-6030) in Diabetes Type II & Obesity

In December 2010, PROLOR acquired the rights to reversible PEGylation (RevPEG)

technology from Yeda Research and Development Company, the technology transfer arm

of the Weizmann Institute of Science (Yeda). This technology is being used to form long-

acting versions of therapeutic peptides and small molecules. Although we anticipate

PROLOR will use its RevPEG license for the development of other products in the future,

the company is currently conducting preclinical work in animals to evaluate the utility of

adding RevPEG technology to the novel peptide oxyntomodulin for the treatment of both

type II diabetes and obesity.

Oxyntomodulin (OXM) is a naturally occurring peptide hormone released from cells of the

gastrointestinal mucosa following food intake. Oxyntomodulin is secreted from distal-

intestinal L-cells and is a peptide that is strongly implicated in satiation (feeling full after

eating)20

. In previous studies the injection of OXM has been shown to suppress appetite,

reduce food intake and body weight without side effects21,22

. It was also shown that

injections in humans decreased body weight by 0.5 kg/wk and more than placebo23

. The

challenge of developing OXM as an anti-obesity therapy is the hormone’s short half-life

and the need for multiple daily subcutaneous injections leading to minor discomfort and a

likely compliance issue.

The formation of a long-acting version of OXM with the addition of RevPEG, called OXM-

RPEG (aka MOD-6030) could reduce the number of required daily injections. By way of

background, many drugs have reached the market using polyethylene glycol (PEG)

conjugates to improve the pharmacokinetics by retarding kidney filtration. We note that

PEG is nontoxic and nonimmunogenic. However, key to PEGylation is releasing the drug

from the PEG carrier using a cleavable linker. Also important is the rate at which cleavage

impacts the amount of drug being released into the body. Therefore, the goal is to design

a linker that releases the drug steadily over time to avoid any unwanted safety issues. The

reversible PEGylation technology developed at the Weizmann Institute of Science and

licensed to PROLOR is a hydrolysable bond that uses fluorenylmethoxycarbonyl linkers24

.

Preclinical Data Summary

In June 2011 PROLOR released preclinical animal data showing significant increases in

weight loss with OXM-RPEG injected once or twice weekly when compared with native

OXM injected twice daily. We highlight that OXM-RPEG was also more potent, with the

total cumulative weekly dose injected being just 15% of the OXM dose over the same

period. In our view, these data suggest OXM-RPEG has clearly increased plasma half-life

with the functional hydrolysable linker versus OXM. In our view, a once- or twice-weekly

injection versus multiple daily injections could make OXM an attractive therapeutic option.

20

Cummings D.E. and Overduin J., Gastrointestinal Regulation of Food Intake. The Journal of Clinical Investigation (2007) 117(1): 13-23. 21

Cohen M.A. et al., Oxyntomodulin Suppresses Appetite and Reduces Food Intake in Humans. The Journal of Clinical Endocrinology & Metabolism (2003) 88(10): 4696-4701. 22

Dakin C.L. et al., Oxyntomodulin Inhibits Food Intake in the Rat. Neuroendocrinology. (2001) 142(10): 4244-50. 23

Wynne K. et al., Subcutaneous Oxyntomodulin Reduces Body Weight in Overweight and Obese Subjects: A Double-Blind, Randomized, Controlled Trial. (2005) 54(8):2390-95. 24

Reversible PEGylation: A Novel Technology to Release Native Interferon Alpha2 Over A Prolonged Time Period. Journal of Medicinal Chemistry (2004) 47(20): 4897-4904.


23

PROLOR presented a variety of preclinical data showing impressive weight reduction

associated with its OXM-RPEG in mice. The study compared OXM dosing 2x/day at 5,000

nmol/kg to OXM-RPEG at 5,000 nmol/kg and 8,000 nmol/kg injected on days 1, 4, and 7

(see Exhibit 15). The results show a 32% reduction in weight at day 12 with OXM-RPEG

versus control. An 8% weight reduction using OXM (2x/day) shows the rapid clearance of

OXM from the body.

Exhibit 15: OXM-RPEG Weight Reduction

Data are adjusted means (n=8–9). SEMs are calculated from the residuals of the statistical model. Data analyzed by ANCOVA with body weight on Day 1 as covariate followed by Williams’ test for PEG40-FMS-OXM and PEG40-EMCS-OXM and multiple t test for OXM 5000, PEG30-FMS-OXM and sibutramine. Significant differences vs. appropriate vehicle: *p<0.05, **p<0.01, ***p<0.001. Source: PROLOR Biotech

Cumulative food intake also declined as a result of OXM-RPEG dosing. With high-dose

OXM-RPEG, a ~50% reduction in cumulative food intake was measured by day 13

(Exhibit 16). Comparatively, an ~8% reduction in cumulative food intake was associated

with OXM (2x/day) injections.

Exhibit 16: OXM-RPEG Preclinical Data Shows Lower Food Intake

Data are adjusted means (n = 8-9). SEMSs are calculated from the residuals of the statistical model. Data analyzed by ANCOVA with baseline (average of days -6 to 0) as covariate followed by Williams’ test for PEG40-FMS-OXM and PEG40-EMCS-OXM and multiple t test for OXM 5000, PEG30-FMS-OXM and sibutramine. Significant differences vs vehicle: *p<0.05, **p<0.01, ***p<0.001. Source: PROLOR Biotech


24

The data supports the weight reduction anticipated for OXM-RPEG and suggests a

superiority of this OXM (OXY) formulation vs. standard PEGylation (OXY-PEG) and

unmodified OXM (Exhibit 17). A more frequent dosing of OXM-RPEG (days 1, 4, and 7)

appears to give a greater benefit than just weekly dosing.

Exhibit 17: OXM-RPEG Preclinical Data Shows Weight Reduction

Data are adjusted (n = 8–9). SEMs are calculated from the residuals of the statistical model. Data analyzed by ANCOVA with body weight on Day 1 as covariate followed by Williams’ test for PEG40-FMS-OXM and PEG40-EMCS-OXM and multiple t test for OXM 5000, PEG30-FMS-OXM and sibutramine. Significant differences vs. appropriate vehicle: *p<0.05, **p<0.01, ***p<0.001. Source: PROLOR Biotech

Upcoming Milestones

We expect that in 4Q12 PROLOR will complete its IND-enabling study and advance OXM-

RPEG into the clinic in 1H13. We believe that given the large and expensive commercial

infrastructure requirement to market an obesity drug, PROLOR is likely to seek a

commercial partner for OXM-RPEG at some point in the future. At this time, we do not

explicitly ascribe value to this program in our valuation of PROLOR, but view it as potential

upside.

Industry Interest in Oxyntomodulin

Given the promise held by OXM for the treatment of obesity and type II diabetes, there are

several large companies with active development programs. These players include Merck,

Boehringer Ingelheim (private), Lilly, Pfizer, and Novo Nordisk. We highlight the

agreement between Denmark-based Zealand Pharma A/S and the privately held German

company, Boehringer Ingelheim GmbH, for an exclusive license to a preclinical

oxyntomodulin variant targeted for single-daily injection. Under the terms of the agreement

Zealand Pharma is eligible to receive up to €376M in total projected milestone payments.


25

Other Development Programs

Creating long-acting versions of currently marketed therapeutic proteins offers clear

competitive advantages. We believe PROLOR will continue to advance new candidates

that stand to benefit from improved dosing frequency and address large markets. With

many marketed therapeutic proteins set to lose patent coverage over the next few years

(many others have no remaining patent coverage), we believe that PROLOR has many

development options to investigate. PROLOR’s long-acting version could have a

significant competitive advantage over biosimilars entering the market.

One of the development programs that we would like to highlight is an extended version of

erythropoietin (EPO), a glycoprotein hormone secreted by the kidney that promotes the

formation of red blood cells in the bone marrow. EPO is used to treat anemia, a condition

commonly seen in cases of chronic kidney disease (CKD) and cancer. In the US the

combined sales of EPOGEN and Aranesp were $3 billion in 2011.

Key Licenses and Agreements

PROLOR has ten US patents forming its IP portfolio (Exhibit 18). Central to its IP are three

patents covering the CTP technology licensed from Washington University. In 2007

PROLOR entered into a new exclusive license agreement with Washington University that

grants PROLOR access to three CTP patents covering all native and non-native

therapeutic proteins and peptides except Chorionic Gonadotropin (hCG), Thyroid

Stimulating Hormone (TSH), Luteinizing Hormone (LH) and Follicle Stimulating Hormone

(FSH). The license extends through the life of these patents and terminates in 2018.

In exchange, under the terms of the license agreement, PROLOR is obligated to pay fees

to Washington University. These fees include a $30K annual license fee as well as royalty

fees of 1.5% to 5% on net revenues and sub-licensing fees of 7.5% to 20%.

In addition to the patents it licensed from Washington University, PROLOR currently has

seven issued patents covering its CTP technology. We believe the company’s IP coverage

may now extend through 2031. This assumption is factored into our market projections.

The company’s IP portfolio is listed below.


26

Exhibit 18: PROLOR Biotech IP Portfolio

Patent Number Issue Date Title Owner Expiration

U.S. # 5,712,122 1/27/1998 CTP-extended proteins Washington University 2018

U.S. # 5,759,818 6/2/1998

N-terminal CTP extended pharmaceutical

peptides and proteins Washington University 2018

U.S. # 6,225,449 5/1/2001

Hormone analogs with multiple CTP

extensions Washington University 2021

U.S. # 7,553,940 2/1/2007

Long-acting EPO polypeptides and

derivatives therof PROLOR Biotech 2027

U.S. # 8,097,435 1/17/2012

Polynucleotides encoding long-acting

growth hormone polypeptides PROLOR Biotech 2032

U.S. # 8,114,836 2/14/2012 Long-acting veterinary polypeptides PROLOR Biotech 2032

U.S. # 7,553,941 6/30/2009

Long-acting polypeptides and methods of

producing same PROLOR Biotech 2029

U.S. # 8,110,376 2/7/2012

Long-acting EPO polypeptides and

derivatives therof PROLOR Biotech 2032

U.S. # 8,048,848 11/1/2011

Long-acting interferons and derivatives

thereof PROLOR Biotech 2031

U.S. # 8,048,849 11/1/2011

Long-acting polypeptides and methods of

producing same PROLOR Biotech 2031

Sources: Company reports; uspto.gov.

Source: Correale J. et al., The Impact of Parasite Infections on the Course of Multiple Sclerosis. Journal of Neuroimmunology (2011) 233: 6-11.

Exclusive License of Reversible PEGylation Technology

PROLOR has an exclusive license agreement with Yeda Research and Development

Company Ltd. (the technology transfer part of the Weizmann Institute of Science). The

license covers Yeda’s proprietary reversible PEGylation technology capable of being used

to form long-acting therapeutic peptides and small molecules. The reversible PEGylation

has encouraging preclinical animal data and is complementary to PROLOR’s CTP

technology platform, in our view. We note that this agreement excludes hemophilia and

insulin, but includes all other therapeutic indications. The license extends through the life

of the patents and includes certain fees, notably a 3.5% royalty on all net future sales.

Since 2009 PROLOR has evaluated this technology under an option agreement and has

focused primarily on in the obesity space (oxyntomodulin).


27

Management Biography Philip Frost, M.D.

Chairman of the Board of Directors

Dr. Frost has served as chairman of the board of directors since March 2008 and as a

member of the board since May 2007. Concurrently, Dr. Frost serves as CEO and

chairman of Opko Health, Inc. Dr. Frost also currently serves as the chairman of the board

of Teva Pharmaceutical Industries Ltd. Dr. Frost served as the chairman of IVAX

Corporation, the multinational pharmaceutical corporation, from 1987 to its acquisition by

Teva in July 2006. In addition, Dr. Frost has served as the chairman of Ladenburg

Thalmann Financial Services since July 2006 and as a director since March 2005. Prior to

founding IVAX, Dr. Frost founded and served as chairman of Key Pharmaceuticals, Inc.

from 1972 until its acquisition in 1986 by Schering Plough Corporation.

Dr. Frost is vice chairman of the board of governors of the American Stock Exchange and

is a trustee of Mount Sinai Medical Center, Scripps Research Institutes, and the Miami

Jewish Home for the Aged. Dr. Frost also serves on the board of regents of the

Smithsonian Institution.

Dr. Frost Holds a B.A. in French literature from the University of Pennsylvania and an

M.D. from the Albert Einstein College of Medicine.

Abraham Havron, Ph.D.

Chief Executive Officer and Director

Dr. Havron serves as the chief executive officer and a director of PROLOR Biotech and

brings over 30 years biotechnology industry experience to his current role. Dr. Havron

joined the company in December 2005 in his current position. Previously, Dr. Havron

served as a as co-founder and director of R&D for Interpharm Laboratories, a Serono

subsidiary. Interpharm Laboratories developed the blockbuster drug Rebif for the

treatment of multiple sclerosis. Dr. Havron also served as vice president manufacturing

and process development for BioTechnology General Ltd., Rehovot, Israel, a subsidiary of

Savient Pharmaceuticals. In addition, at Clal Biotechnology Industries Ltd., Dr. Havron

served as vice president and chief technology officer. Dr. Havron holds a Ph.D. in bio-

organic chemistry from the Weizmann Institute of Science.

Shai Novik

President and Director

Mr. Novik is currently a member of the board of directors and serves as president of

PROLOR Biotech. From 2003 to 2005, Mr. Novik served as the managing director of A.S.

Novik, a private investment firm. From 2000 to 2002, he served as the managing director

of the investment firm, A-Online Capital. Mr. Novik also served as the chief operating

officer and head of strategic planning for the life sciences investment company, THCG.

THCG held a portfolio of life sciences and medical device companies and was itself a

portfolio company of the large private equity fund, Greenwich Street Partners. Mr. Novik

served for seven years in the Israeli Defense Forces and holds an M.B.A., with distinction,

from Cornell University.


28

Faud Fares, D.Sc.

Chief Scientific Officer and Director

Dr. Fares is a founder of the company and currently serves as its chief scientific officer

and a member of the board of directors. While a post-doctoral student with Prof. Irving

Boime at Washington University in St. Louis, Dr. Fares worked on the findings and

experiments that form the core of PROLOR’s technology. After returning to Israel in 2001

Dr. Fares formed the company to license the CTP technology from Washington University

for certain therapeutic indications. Dr. Fares is also currently the head of the Molecular

Biology Division, Biochemical Research Unit, Department of Biochemistry and Molecular

Genetics at the Carmel Medical Center in Haifa, Israel. The author of over 40 scientific

articles and book chapters, Dr. Fares is also the recipient of several awards, including the

prestigious Lindner Prize of the Israel Endocrine Society (2004), and the Shawers Prize of

the Israel Endocrine Society (1997). Dr. Fares graduated from the department of

pharmacology at Technion – Israel Institute of Technology (Haifa, Israel).

Eyal Fima, Ph.D.

Chief Operating Officer of Modigenetech, Ltd. – PROLOR Biotech’s wholly owned

R&D subsidiary.

Dr. Fima serves as the chief operating officer of Modigenetech, Ltd., the company’s wholly

owned subsidiary, and previously served as Modigenetech’s vice president of product

development. From 2001 to 2002, Dr. Fima served as a co-founder and CEO of

NatSpears Ltd., a biotechnology company focused on the treatment of prostate cancer.

Previously, Dr. Fima was a research fellow at the Immunology Department of ben-Gurion

University in Israel from 2002 to 2005. In addition, as coach of the Israel Taikwondo team,

Dr. Fima led the team to medals in the 1998 and 2000 world championships, as well as

the 1997, 1998, and 1999 European championships. Dr. Fima holds a Ph.D. in

immunotherapeutic protocols and cytokines regulation from Ben-Gurion University’s

Medical School in Israel, and an MBA from the School of Business at Ben-Gurion

University in Israel.

Stock prices of companies mentioned that are not covered by Oppenheimer & Co.

(priced as of 8/27/12):

Baxter (BAX-NYSE, $59.11) Ladenburg Thalmann Financial Svcs (LTS-NYSE, $1.37) Lilly (LLY-NYSE, $43.70) Merck (MRK-NYSE, $43.19) Novo Nordisk A/S (NVO-NYSE, $156.34) Opko Health, Inc. (OPK-NYSE, $4.51) Pfizer (PFE-NYSE, $24.04) Zealand Pharma A/S (ZEAL-DK, DKK 88.50)


29

Financial Statements

Exhibit 19: Historical & Projected Income Statement

Historical and Projected Income Statement ($000s) Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

FY Ends December 31st 1QA 2QA 3QA 4QA 1QA 2QA 3QE 4QE 1QE 2QE 3QE 4QE

Revenues - - - - - - - - - -

Total Revenue - - - - - - - - - - - - - - - - -

OPERATING EXPENSES

In-process research and development write-off

Research and development, net 5,555 5,220 3,035 2,377 2,126 3,883 11,422 4,304 2,126 4,500 4,500 15,430 5,000 5,000 5,000 5,000 20,000

General and adminsitrative 1,902 2,457 709 878 808 1,030 3,425 790 859 850 1,000 3,498 900 900 900 1,000 3,700

Total Operating Expenses 7,457 7,677 3,744 3,255 2,935 4,913 14,847 5,094 2,985 5,350 5,500 18,929 5,900 5,900 5,900 6,000 23,700

Operating (loss) income (7,457) (7,677) (3,744) (3,255) (2,935) (4,913) (14,847) (5,094) (2,985) (5,350) (5,500) (18,929) (5,900) (5,900) (5,900) (6,000) (23,700)

Financial income, net (27) 118 277 165 (550) (108) (216) 94 (84) 90 90 190 90 90 90 90 360

(Loss) income before income tax benefit (expense) (7,485) (7,559) (3,467) (3,090) (3,484) (5,022) (15,063) (4,999) (3,069) (5,260) (5,410) (18,739) (5,810) (5,810) (5,810) (5,910) (23,340)

Income tax benefit (expense)

Net (loss) income (7,485) (7,559) (3,467) (3,090) (3,484) (5,022) (15,063) (4,999) (3,069) (5,260) (5,410) (18,739) (5,810) (5,810) (5,810) (5,910) (23,340)

Basic and diluted (0.21)$ (0.19)$ (0.08)$ (0.07)$ (0.06)$ (0.09)$ (0.29)$ (0.09)$ (0.05)$ (0.08)$ (0.09)$ (0.31)$ (0.09)$ (0.09)$ (0.09)$ (0.08)$ (0.36)$

Basic and diluted shares outstanding 35,549 40,030 43,360 43,409 54,342 54,565 51,961 54,730 59,311 62,785 63,035 59,965 63,285 63,535 63,785 71,535 65,535

FY13EFY09A FY10A FY11A FY12E

Source: Company reports; Oppenheimer & Co. estimates.


30

Exhibit 20: Historical Balance Sheet

Historical Balance Sheet ($000s)

ASSETS Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

Current Assets 1QA 2QA 3QA 4QA 1QA 2QA

Cash and cash equivalents 3,522 24,474 22,335 16,011 15,967 13,262 13,262 7,250 26,617

Short term deposits - 1,439 319 3,258 1,663 139 139 1,884 15,836

Accounts receivable and prepaid expenses 85 642 506 1,413 245 329 329 382 491

Restricted cash 92 103 171 174 162 99 99 - 57

Total current assets 3,699 26,659 23,331 20,857 18,038 13,829 13,829 9,516 43,002

Long-term Assets

Property and equipment, net 284 350 380 793 813 898 898 964 940

Assets held for employees' severance payments 124 193 212 232 227 234 234 259 259

Restricted cash - - - - - 59 59 61 -

Long term deposit 2 2 2 2 3 4 4 5 2

Total long-term Assets 411 546 595 1,027 1,043 1,196 1,196 1,289 1,202

Total Assets 4,109 27,205 23,926 21,883 19,081 15,025 15,025 10,805 44,204

LIABILITIES

Current Liabilities

Trade payables 132 429 152 435 572 359 359 986 157

Related parties payable 204 207 55 66 63 221 221 65 59

Accrued expenses and other liabilities 505 1,353 1,310 1,578 1,260 1,638 1,638 1,020 1,033

Total Current Liabilities 840 1,990 1,516 2,079 1,895 2,219 2,219 2,071 1,249

Liability in Respect of Employees Severance Payments 265 285 277 285 334 332

STOCKHOLDER'S EQUITY

Stock capital -

Preferred stock 0 - - - - - - - -

Common shares 0 1 1 1 1 1 1 1 1

Additional paid-in capital 30,154 59,578 60,196 60,660 61,534 62,168 62,168 63,046 100,338

(Deficit) accumulated during the development stage (27,025) (34,584) (38,051) (41,141) (44,625) (49,647) (49,647) (54,646) (57,716)

Total stockholders' equity 3,129 24,995 22,145 19,519 16,909 12,521 12,521 8,400 42,623

Total liabilities and stockholders equity 4,109 27,205 23,926 21,883 19,081 15,025 15,025 10,805 44,204

FY11AFY09A FY10A

Source: Company reports.


31

Investment ThesisPROLOR Biotech is a development-stage biopharmaceutical company developing proprietary long-acting versions of alreadyapproved therapeutic proteins. The company's leading asset is hGH-CTP, a long-acting version of human growth hormonefor the treatment of growth hormone deficiency. If successful, hGH-CTP will reduce dosing requirements from daily injectionsto just one injection per week. PROLOR will soon commence a pivotal Phase III trial of hGH-CTP in adult growth hormonedisorders. If successful, we believe PROLOR's hGH-CTP stands to capture significant share in the $2.5-$3B growth hormonemarket.

Price Target CalculationOur valuation is based on an NPV analysis of hGH-CTP in the US and EU in human growth deficiencies (HGD). We estimatepeak worldwide revenues in HGD of $1.6B and risk adjust our projections by assigning a 70% chance of approval. Applyinga 15% discount rate we reach a NPV of $500M, or approximately $7/share.

Key Risks to Price TargetKey risks include clinical trial risk, regulatory risk, competitive risk, partnership risk, reimbursement risk, and liquidity and smallcapitalization risk. Note: Stocks trading under $5 may be considered speculative and appropriate for risk-tolerant investors.

Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about thesubject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no partof his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views containedin this research report.Potential Conflicts of Interest:Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firmincluding the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensationbased upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any researchanalyst and any member of his or her household from executing trades in the securities of a company that such researchanalyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer,director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in coveredcompanies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long positionof less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options,futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoingarrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.


32

All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co.Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories,please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department,Business Manager.

Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:

Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.

Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.

Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.

Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflictof interest.

Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:

Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/orthe ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.

Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to aperceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higherrated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressivetrading accounts might decide to liquidate their positions to employ the funds elsewhere.

Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceivedin the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 318 55.69 134 42.14

PERFORM [P] 250 43.78 89 35.60

UNDERPERFORM [U] 3 0.53 1 33.33

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do notcorrelate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assignedbuy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.

Company Specific DisclosuresOppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3months from PBTH.

In the past 12 months Oppenheimer & Co. Inc. has received compensation for investment banking services from PBTH.

In the past 12 months Oppenheimer & Co. Inc. has managed or co-managed a public offering of securities for PBTH.

In the past 12 months Oppenheimer & Co. Inc. has provided investment banking services for PBTH.

Additional Information Available


33

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